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Conduct Spend Analysis

Spend analysis is the process of collecting, refining, and analyzing spend data. The purpose of a spend analysis is to identify:

How much the Postal Service/Client is spending

Category of spend

Potential savings

Spend analyses are used to support a wide range of activities, from strategic sourcing to budgeting and planning. Sufficient visibility and analysis of spending information broaden the Postal Service's ability to:

Understand spending patterns

Maximize buying leverage

Execute informed sourcing and supply management decisions

Optimize budgeting and planning

Measure the impact of changes in cost, inflation, economic conditions, etc.

An initial estimate of how much the Client organization is spending and how much spending is planned to take place must be made before the spend analysis process can begin. This can help in the development of opportunity assessments for future projects or investments.

When spend analysis is overlooked or executed on an ad hoc basis, it can result not only in highly fragmented buying strategies that fail to fully leverage the Postal Service's purchasing power, but also in misguided purchase decisions and missed opportunities for cost savings.

Spend Analysis Process

The historical spend analysis provides an effective tool for consolidating enterprise-wide data, establishing baselines, and anchoring strategic sourcing decisions. The five processes required for effective spend analysis are represented in Figure 2.6.

Figure 2.6

Spend Analysis Process

image of figure 2.6 spend analysis process

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Define and Extract Data

Spend information from the Client organization needs to be defined and gathered to begin the spend analysis process. Data collection can be a large effort, depending on the level of sophistication, usage, and degree of integration of the back-office systems.

Typical data elements required to understand the spend analysis include:

Purchasing organization

Supplier name and number

Category name and code

Commodity name and code

Spend amount


Number of purchase orders, deliveries, and invoices

Contract number

Purchase and invoice transaction types

Typical sources of spend data include:

Relevant information systems (e.g., Finance, including accounts payable, supplier master file; Purchasing, such as Corporate Supply Management Open Strategy [COSMOS]; and Supply Management [SM] Operations, such as Material Distribution Inventory Management System [MDIMS])

Purchase card management reports

Manual systems (e.g., spreadsheets)

Hard-copy invoices, purchase orders, and contracts

Stakeholder interviews

Supplier interviews

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Review Item Purchase History

Reviewing an item's purchase history is another sound source of previous spending data. Purchase histories contribute to the development of a clear understanding of the existing purchasing process while providing an opportunity to determine whether any steps require modification or elimination. Some benefits of reviewing purchase histories include:

Tracking orders from point of sale to delivery

Controlling inventory discrepancies and late orders

Determining the extent to which suppliers can lower prices

Improving the quality and timeliness of the delivered product or service

When reviewing item purchase histories, it is also important to consider:

Market research

Product description

Order tracking

The primary objectives of reviewing the item's purchase history are:

Determine whether to renew contract(s) with an existing supplier or switch to a new supplier

Evaluate whether products or services that were purchased met specific Postal Service needs

Use of purchase history data is as simple as obtaining them, because the information can be found anywhere from contract files to reports of contract awards. The Purchase/SCM Team can look back at products and services purchased in the past from a given supplier, review the terms and conditions of previous contracts awarded, and compare pricing information to determine whether any changes or modifications need to be made in the future.

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The Purchase/SCM Team must ensure that data files are accurate and complete before classifying or analyzing spend information. Validation is performed by checking results with relevant stakeholders and suppliers. Comparing historical spend by purchasing organization to current year spend budgets provides an excellent check of analysis integrity. As necessary, Purchase/SCM Teams can adjust data, fill in gaps, and agree on priorities for further investigation. The ability to reconcile the spend analysis with the current budget is critical to building credibility with customers and measuring results.

Refine and Classify

Because data are typically collected from multiple sources, they must be reviewed to eliminate duplicates. To this end, the Postal Service rationalizes and classifies spending data elements and attributes.

Typical cleansing needs that should be noted include:

Supplier names are spelled differently and thus treated as different suppliers (e.g., GE, G.E., Gen. Elec., and General Electric)

Parent-subsidiary relationships are not captured, and the company is treated as different companies (e.g., Time Warner vs. America Online, Inc. vs. Netscape)

Recent mergers or acquisitions among suppliers or company name changes are not captured and thus treated separately (e.g., Southern Bell Company vs. GTE)

Tasks that are evident in this process include compiling data into database tools, categorizing purchased items, identifying gaps and inconsistencies, and producing high-level spend baseline and priority listings.

Each system containing purchasing data likely uses different data structures and nomenclature by item, commodity, category, and supplier. As a result, after the data are refined, they should then be classified to remove errors and inconsistencies and to create a standard language for useful analysis.

Examples of classification schemes include:

Aligning the dates of spend data

Converting to common currency

Assigning and/or correcting common category classifications and associated commodity names

Accounting for divested or discontinued businesses

Accounting for future capital expenditures and other investments

This analysis requires consolidation of data from multiple sources and varied formats into structured and manageable database(s).

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Analyze Data

Data must be analyzed across each dimension (e.g., product, supplier, location). Spend data is analyzed to help understand:

What is the baseline for the entire Postal Service or Category Management Center (CMC)?

What proportion of spend is within the scope of the particular purchase being considered?

Are there components of spend that can be targeted for price reduction or savings?

What portions of spend are for direct, indirect, and capital purposes?

To make effective use of spend information, various employees within the Postal Service, from commodity managers to financial managers, must be able to access and analyze the information, using advanced reporting and analytical tools.

Identify Opportunities

Based on validated spend analysis, the Purchase/SCM Team should compare findings against initial estimates and refine the opportunity assessment. Doing so may reveal opportunities to:

Rationalize suppliers and items

Consolidate spending across business units and geography

Identify purchase price variances (PPVs)

Improve contract compliance

Increase diversity expenditure

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Other Topics Considered

Conduct Market Research and Benchmarking Analysis topic, Decide on Make vs. Buy task, Process Step 1: Identify Needs

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